Real estate has been one of the weakest sectors in the stock market during the COVID-19 pandemic, and hotel REITs, or real estate investment trusts, have been one of the worst-performing subsectors. Simply put, travel isn't taking place at anything close to pre-pandemic levels.
While 2020 certainly wasn't pretty, there could be some interesting opportunities for long-term investors in the hotel REIT space. However, before you add any hotel REITs to your portfolio in 2021, here are three things to keep in mind.
There are three major types of hotel REITs
Obviously, there are more than three kinds of hotels. But for the purpose of hotel REIT investors in 2021, they can be separated into three main categories: hotels that focus on leisure travel, business travel, and group (conference and convention) travel.
The reason I'm pointing this out is because all three have been affected by the pandemic in very different ways. Group events like conferences and conventions are not happening and haven't been for about 10 months now. In fact, some group-focused hotel operators have even kept some of their properties closed. For example, Ryman Hospitality Properties' (NYSE: RHP) Gaylord National Harbor in the D.C. area remains closed, and some Las Vegas casino hotels (which are highly dependent on group business) remain closed, either on weekdays or entirely.
On the other hand, business travel has started to make a bit of a comeback. So-called "select service" hotel REITs like Apple Hospitality REIT (NASDAQ: APLE) are highly dependent on business travel and have seen business pick up noticeably since the early days of the pandemic.
Last but certainly not least, while leisure travel is still a long way from pre-pandemic levels, it has picked up much more than business travel. Think of it this way -- business meetings are largely being conducted via Zoom (NYSE: ZM), but places like Disney World are open and can only be experienced in person. So, while hotel REITs that specialize in leisure properties have generally underperformed the S&P 500, most have outperformed their business- and group-focused peers.
Business should come back in 2021, but slowly
The big question on hotel REIT investors' minds is "will things ever return to 2019 levels?" And the answer is likely "yes." But it will probably take quite a bit longer than you might expect.
We have safe, effective vaccines now, which all but ensures the pandemic will eventually end. But we're still a long way from herd immunity in the United States, and nobody knows when that will happen. For hotels that get a substantial portion of their business from international travel, it's worth noting that vaccine rollouts in many other countries have been significantly slower than in the U.S.
Once we've reached herd immunity and pandemic measures can be relaxed, things can start to return to normal. But it will take time -- and not just on the group events side of the hotel business. The owners of the Empire State Building recently said they don't expect visits to the observatory (a good indicator of leisure travel in New York City) until the fourth quarter of 2022. Sure, there's some pent-up demand for travel, but there are also people who will be hesitant to travel at first, especially from abroad.
There could still be some long-term bargains for patient investors
Many hotel REITs have rebounded dramatically since the lows of the early days in the pandemic. But most are still well below where they were before the coronavirus outbreak started. Consider the one-year performance of these major hotel REITs: